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Gold

Gold

To be fair, some gold coins were actual money many years ago, like the $20 gold piece. In some states, it is legal to use these coins today as money, but only for face value. For all intents and purposes, gold is not money today.

In fact, the yellow metal is not identified as “money,” or currency, in any major country.

Gold was a great standard for monetary systems up until the industrial revolution when it was a shining example of the commodity economy — a very concentrated value per weight and size.

Today, it isn’t representative of the information-based economy and it’s too costly to be a medium of exchange. What does it cost to produce a dollar? Maybe a couple of cents?

What does it cost to produce a dollar’s worth of gold?

A dollar.

Welcome to the gold conversation.

None of this means that it’s not valuable. The same countries that do not allow gold as a currency also keep their shares in vaults. Go figure. But the amount of things you can buy with gold fluctuates dramatically, which reflects the true nature of the metal.

It’s a commodity.

If gold were a currency, then we would discuss it in terms of stable valuation. A piece of eight (one-eighth of a gold coin) would buy a good meal, including wine. Or, it might buy 10 hours of labor, or represent half a car payment.

These values would not change very much, if at all, over the course of a year. Gold would be the basic measure we used to establish value for the everyday things in our lives, like food, labor, and shelter.

But we don’t. Instead, the precious metal is free to gyrate wildly, up and down, or not at all. We talk about this movement in dollars, which brings us to the other side of the conversation – greenbacks.

The value of a dollar changes over time, but usually very slowly, as do our payments for labor and shelter. But it does change, and can be affected by many things, including the U.S. deficit and central bank actions.

If we collectively believe the value of the dollar is falling, then we’ll demand more of them as payment for goods and services. We’ll also have to shell out more dollars when we buy commodities, like oil and copper. Since gold is a commodity, we’ll have to pay more for that as well.

But none of this changes the fact that the yellow metal is not money today.

Instead, it is a commodity with very special properties. It is concentrated (a high value by weight), doesn’t disintegrate, rot, or go bad, can be molded into any form, and exists in limited quantities. These are many reasons why people around the world still think it’s so valuable.

But beyond all of its physical qualities, gold’s most valuable quality is the fact that so many people put their faith in it, which is something that cannot be fully explained.

Why is this metal, which has few uses beyond decoration, considered a standard of value around the world and across thousands of years?

Gold moves like other commodities, just easier to haul around in small quantities. The value of the metal is simply the flip side of our common view of the currency in question. It’s not because gold is money.

In principle, gold is a hedge against a weaker dollar. But there is nothing right now that indicates the dollar will weaken, for a variety of reasons.

If the financial system ever truly blew up, we’re all going to be fighting over canned goods, ammo and gasoline. Gold really isn’t going to get you very far.

Being less dramatic though, think back to 2008. When the bottom fell out and the market crashed, the price of gold crashed right along with it. The only things that held their value were the U.S. dollar and U.S. Treasurys.

If you worry about a crisis brewing, by all means, prepare for it.

Keep cash on hand and keep your debts manageable; people who had dry powder made out like a bandit in the aftermath of 2008.

And if you’re convinced the end of the world is nigh… well, I suppose you should stock up on canned goods, ammo and gasoline and store it all in a bunker in Idaho, complete with a lifetime supply of tinfoil hats.

But in no scenario do we see gold really having much value as a crisis hedge. Because as we saw in 2008, whatever value gold might’ve had in the past, today it’s just another financial asset.

I have so many bets on the go with gold bugs like Porter Stansberry (Stansberry Research) and Jeff Clark at Casey Research… and I just keep winning ‘em.
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